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AT&T-Time Warner Merger: Does the DOJ Have a Case?

The surprising Department of Justice lawsuit to block AT&T’s merger with Time Warner may end up in an epic courtroom showdown, unlike any recent antitrust challenge in recent memory.

The DOJ’s 23-page complaint lays out a case that is notable for its straightforward argument: The bulked-up AT&T-DirecTV-Time Warner would have the leverage and incentive to withhold prized content, like channels featuring “Game of Thrones” and NBA games, from rivals or new entrants.

AT&T, meanwhile, finds that argument specious and a diversion from the way that the government has handled antitrust law. Its CEO Randall Stephenson said on Monday evening that it “stretches the reach of antitrust law beyond the breaking point.”

In the wake of the lawsuit, a number of public interest groups, politicos, and Wall Street analysts quickly weighed in, sometimes diverting from traditional ideological boundaries.

Berin Szoka, president of TechFreedom, said in a statement that it was “odd to see the Trump DOJ taking a Carter-era, European-style approach to vertical mergers.” The Competitive Enterprise Institute’s Ted Frank and Frank Bednarz argued that “when vague hipster concerns about the bigness of firms are actionable, regulators have a free hand to demand conditions for political or personal advantage.”

Politics has entered into this merger review, as questions have been raised of whether President Donald Trump’s hatred of CNN played into the decision to sue to block the merger. CNN is a unit of Time Warner, but antitrust chief Makan Delrahim has denied that the White House influenced his decision to try to stop the transaction as is.

Sen. Richard Blumenthal (D-Conn.) wrote on Twitter that the Justice Department “can anticipate a tough battle, but it deserves support for the protecting against undue power and possible abuse that harms innovation and consumer choice.”

He added, “I remain appalled by Pres. Trump’s attempts to weaponize antitrust law because he disagrees with CNN’s coverage, and I’ll continue to oppose any improper influence by White House and any attempts by administration to chill freedom of speech.”

Larry Downes, the project director of the Georgetown Center for Business and Public Policy, said that the Justice Department will have a difficult time proving its case.

“The DOJ simply asserts that somehow TW will be able to charge more to its distribution customers once it’s part of AT&T, but that assertion will be impossible to prove at trial,” he said via email. “The markets for media entertainment and news in which TW operates are highly competitive, both from traditional media companies and with new media powerhouses including YouTube, Netflix, Hulu, Amazon, Apple, and Instagram.”

He added, “There is no evidence that TW could be charging more than it is — quite the contrary. At the same time, having paid $85 billion for the TW content, the only rational strategy for AT&T would be to find new markets for that content, whose entire cost is borne up-front in creation. That will make media markets even more competitive and, if anything, lower prices.”

But on their blog on Tuesday, respected media analysts Craig Moffett and Michael Nathanson write that “the DOJ’s argument is simple: AT&T cannot lawfully be given this market power, because the incentives for them to abuse it are self-evident. Contrary (again) to much of the rhetoric floating around with respect to the DOJ’s suit, it is simply not the case that this is a ‘novel’ legal theory.”

They add, “Section 7 of the Clayton Act, as amended in 1950, is clear on this topic. Vertical mergers are held to the same anticompetitiveness standard as are horizontal ones. AT&T’s counter-argument, that they have no intention of behaving anticompetitively (say, by withholding content from existing or potential competitors) is unlikely to be convincing to the Courts.”

They also point to program access rules, which were allowed to expire in 2009 and “were specifically written to prevent the exercise of undue (anticompetitive) market power by vertically integrated media companies.”

Moffett and Nathanson also pointed to the broader questions raised by the DOJ at a time when media and entertainment giants are feeling the urge to merge. Twenty-First Century Fox is the big game that has surprisingly come into play as a takeover target during the past few weeks.

“The implications of all this for the various proposed transactions for Fox’s assets should be obvious,” Moffett and Nathanson wrote.

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